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The Case Against Larry Summers

The job of Federal Reserve chairman is as much about character and temperament as it is intellect and experience. That’s why he shouldn’t get it.

National Journal

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Michael Hirsh

Sept. 12, 2013, 4:15 p.m.

Lawrence Henry Sum­mers is one of the world’s most em­in­ent eco­nom­ists. He won the John Bates Clark Medal giv­en every two years to the na­tion’s best eco­nom­ist un­der 40 — an award so com­pet­it­ive that some eco­nom­ists say it’s as pres­ti­gi­ous as a No­bel Prize. His fel­low eco­nom­ists cite his work even more fre­quently than that of Fed­er­al Re­serve Board Chair­man Ben Bernanke. Sum­mers also has more ex­per­i­ence than any seni­or U.S. of­fi­cial in memory, in­clud­ing Bernanke, in deal­ing with the fin­an­cial crises that have be­come the reg­u­lar re­spons­ib­il­ity of Fed chair­men since the Great De­pres­sion. He star­ted in the Re­agan ad­min­is­tra­tion, when he was seni­or staff eco­nom­ist on the Coun­cil of Eco­nom­ic Ad­visers, then moved on to be­come Treas­ury sec­ret­ary un­der Pres­id­ent Clin­ton, and, fi­nally, Pres­id­ent Obama’s chief eco­nom­ic ad­viser in the middle of the worst fin­an­cial crisis since the 1930s. Sum­mers holds mostly middle-of-the-road but pro­foundly in­formed views on fin­ance that make him fairly un­con­tro­ver­sial as a pro­spect­ive stew­ard of the Fed’s man­date, which is to con­trol in­fla­tion, re­duce un­em­ploy­ment, and guide eco­nom­ic growth.

So, on pa­per, Sum­mers is a su­perb can­did­ate to suc­ceed Bernanke in a post that the bril­liant 58-year-old Har­vard pro­fess­or has pined for since his earli­est days in Wash­ing­ton, ac­cord­ing to long­time as­so­ci­ates. Obama is re­portedly fond enough of Sum­mers that he may name him in the next few weeks, passing on a chance to ap­point Janet Yel­len, the widely ad­mired cur­rent vice chair­wo­man, who is said to be the oth­er ma­jor con­tender, as the first fe­male Fed chief in his­tory.

And yet Sum­mers is a very risky choice for chair­man — far ris­ki­er than Yel­len, who would un­doubtedly win over­whelm­ing con­firm­a­tion and was re­cently rated the Fed’s most ac­cur­ate fore­caster since 2009 on is­sues from growth to jobs to in­fla­tion.

The Fed­er­al Re­serve chair­man wields such enorm­ous power, with so little ac­count­ab­il­ity, that he or she is said to be the second-most-power­ful per­son in gov­ern­ment after the pres­id­ent. De­cisions are ha­bitu­ally made in secret. The job re­quires a per­son of great per­son­al tact, sub­tlety, and self-con­trol. It re­quires someone who knows how to build con­sensus at the highest levels for the right kind of policies — someone who pos­sesses the ma­tur­ity and char­ac­ter to ad­mit er­ror and shift course when needed.

But, ac­cord­ing to nu­mer­ous ac­counts from those who have worked with him, Sum­mers has of­ten dis­played the op­pos­ite at­trib­utes dur­ing his long ca­reer. Be­hind the scenes, he has used his power, com­bined with in­tel­lec­tu­al ar­rog­ance, to bully op­pon­ents in­to si­lence, even when they have been proved right. He has re­fused to al­low his dis­sent­ers a voice at the table and ad­op­ted a policy of nev­er ad­mit­ting er­rors.

And Sum­mers has made a lot of er­rors in the past 20 years, des­pite the em­in­ence of his re­search. As a gov­ern­ment of­fi­cial, he helped au­thor a series of ul­ti­mately dis­astrous or wrong­headed policies, from his big de­reg­u­lat­ory moves as a Clin­ton ad­min­is­tra­tion ap­par­at­chik to his too-tep­id re­sponse to the Great Re­ces­sion as Obama’s chief eco­nom­ic ad­viser. Sum­mers pushed a stim­u­lus that was too meek, and, along with his chief ally, Treas­ury Sec­ret­ary Timothy Geithner, he helped to en­sure that mil­lions of des­per­ate mort­gage-hold­ers would stay un­der­wa­ter by fail­ing to sup­port a “cram­down” that would have al­lowed fed­er­al bank­ruptcy judges to have banks re­duce mort­gage bal­ances, cut in­terest rates, and lengthen the terms of loans. At the same time, he sup­por­ted every bail­out of fin­an­cial firms. All of this has left the eco­nomy still in the doldrums, five years after Leh­man Broth­ers’ 2008 col­lapse, and hurt the middle class. Yet in no in­stance has Sum­mers ever been known to pub­licly ac­know­ledge a mis­take.

Wiel­ded by a Fed chair­man, those per­son­al traits and policy at­ti­tudes are a po­ten­tially com­bust­ible mix at a time when the Fed­er­al Re­serve has be­come, more than ever, the most power­ful eco­nom­ic in­sti­tu­tion on earth, and when re-reg­u­la­tion of the glob­al fin­an­cial sys­tem is sub­stan­tially in the hands of the Fed. The man whom Sum­mers once con­sidered a mod­el chair­man, Alan Green­span, of­fers an ex­ample of the dangers of be­ing too cer­tain of one’s views without much ac­count­ab­il­ity. Back in 1994, Con­gress in­struc­ted the Fed to po­lice un­fair and de­cept­ive prac­tices re­lated to mort­gage loans. But be­cause the chair­man be­lieved in min­im­al reg­u­la­tion, no rules were ever writ­ten; Green­span quietly slapped down ef­forts by gov­ernors such as Ed Gram­lich to warn him; and the Fed did little to in­ter­vene in the emer­ging subprime fraud.

There is no ques­tion about Sum­mers’s in­tel­lect and ex­per­i­ence. But would he have the char­ac­ter, tem­pera­ment, and ma­tur­ity to listen to a naysay­er enough to ad­mit er­ror and re­verse course in the next crisis? His his­tory sug­gests oth­er­wise.

FIGHT­ING WORDS

Nobody who has spent so much time work­ing in gov­ern­ment has a per­fect re­cord, but Sum­mers has rarely shown enough hu­mil­ity to won­der wheth­er his an­swer may not be the best one — an at­ti­tude that has led him to side­line op­pon­ents no mat­ter the mer­it of their ar­gu­ments. “As every­body knows, Larry is very smart, and he likes to show it,” Alan Blinder, who served on Clin­ton’s Coun­cil of Eco­nom­ic Ad­visers and later as Fed vice chair, said in an in­ter­view a few years back. And Sum­mers’s policy er­rors, when he’s made them, have been out­right cata­stroph­ic.

As deputy Treas­ury sec­ret­ary un­der Robert Ru­bin in the mid-‘90s, he dis­missed those ex­perts, such as Blinder and No­bel-win­ning eco­nom­ist Joseph Stiglitz, who wanted a more cau­tious open­ing up of glob­al cap­it­al flows; in the years since, these ram­pa­ging tides of “hot” cap­it­al have caused as­set bubbles in one eco­nomy after an­oth­er, with too little in­sti­tu­tion­al re­straint on the part of de­reg­u­lated banks. Sum­mers fam­ously — even bru­tally — fought ef­forts to reg­u­late de­riv­at­ives, which are es­sen­tially bets on the rise and fall of as­set val­ues and which, es­cal­at­ing in­to the mul­tiple tril­lions of dol­lars, helped to put many fin­an­cial firms at risk. And early in the Obama ad­min­is­tra­tion, he worked hard to mar­gin­al­ize a widely revered former Fed chair­man, Paul Vol­ck­er, who pushed for great­er fin­an­cial reg­u­la­tion.

Sum­mers helped mid­wife a ma­jor series of policy er­rors dat­ing back 20 years that led dir­ectly to what many eco­nom­ists now be­lieve was the worst fin­an­cial crisis ever. In par­tic­u­lar, Sum­mers’s op­pon­ents — he faces a phalanx of op­pos­i­tion among Demo­crats on the Hill — point to the Com­mod­it­ies Fu­tures Mod­ern­iz­a­tion Act of 2000, which ef­fect­ively de­reg­u­lated the glob­al mar­ket in over-the-counter de­riv­at­ives and was Sum­mers’s sig­nal achieve­ment as Treas­ury sec­ret­ary. The fi­nal re­port of the Fin­an­cial Crisis In­quiry Com­mis­sion con­vened by Con­gress in 2009 puts the gov­ern­ment’s fail­ure to rein in these de­riv­at­ives at “the cen­ter of the storm.”

Sum­mers has, since then, en­gaged in what ap­pears to be an ef­fort to deny or cov­er up these er­rors and pos­ture as a cham­pi­on of reg­u­la­tion — an act of mis­rep­res­ent­a­tion that flab­ber­gasts many former col­leagues and con­gres­sion­al op­pon­ents. Some pro­gress­ives who want tough­er reg­u­la­tion of Wall Street, such as Demo­crat­ic Sen. Maria Can­t­well of Wash­ing­ton, say they couldn’t vote for him un­less they heard some kind of mea culpa. “Nobody is go­ing to get my sup­port un­less own­ing up to mis­takes of the past,” Can­t­well told the Seattle Post-In­tel­li­gen­cer re­cently. Sheila Bair, the Re­pub­lic­an former head of the Fed­er­al De­pos­it In­sur­ance Corp., and a lead­ing pro­ponent of great­er reg­u­la­tion, agrees. “One of the things that both­ers me about Larry is that he’s nev­er really said he made any mis­takes,” Bair said in a re­cent CN­BC in­ter­view. “That wor­ries me.” Over the sum­mer, in an un­usu­al move, 19 Demo­crat­ic sen­at­ors and one in­de­pend­ent sent Obama a let­ter en­dors­ing Yel­len for the Fed, mean­ing that a Sum­mers nom­in­a­tion would prob­ably be as tough and con­tro­ver­sial as Chuck Hagel’s was as De­fense sec­ret­ary.

Oth­er crit­ics say the nature of the mis­takes both­ers them as much as Sum­mers’s tend­ency to ab­solve him­self. “If you didn’t make a lot of mis­takes, that would be one thing,” says Stiglitz, who battled Sum­mers over a wide range of is­sues dur­ing the Clin­ton ad­min­is­tra­tion, when Stiglitz was chair­man of the Coun­cil of Eco­nom­ic Ad­visers and then chief eco­nom­ist at the World Bank. “In terms of judg­ment, in fore­cast­ing his re­cord has been at­ro­cious. He un­der­es­tim­ated the sever­ity of [the] 2008 crisis. He un­der­es­tim­ated the East Asi­an crisis [of the late 1990s]. He didn’t un­der­stand that simply rais­ing in­terest rates would have the hor­rible ef­fects” in In­done­sia.

Even as Sum­mers left a trail of bit­ter­ness across two dec­ades of high-level policy fights in Wash­ing­ton, he gained many de­fend­ers: seni­or of­fi­cials who ad­mire his acu­men and say his per­son­al is­sues are ex­ag­ger­ated. Most tend to be his former col­leagues in the Clin­ton ad­min­is­tra­tion, who them­selves have reas­on to play down the de­reg­u­lat­ory mis­takes of that era. Still, Sum­mers is ad­mired for stick­ing by his sub­or­din­ates, who of­ten re­turn his loy­alty in kind. He pos­sesses a dry, some­times self-de­prec­at­ing, sense of hu­mor and a rest­less in­tel­lec­tu­al curi­os­ity that is said to have ap­pealed to Obama and might be healthy in a Fed chief, ab­sent oth­er per­son­al­ity flaws. Throughout his ca­reer, Sum­mers has im­pressed su­per­i­ors with his in­tel­lec­tu­al pyro­tech­nics and an amaz­ing fa­cil­ity to ar­gue both sides of de­bate bet­ter than any­one — to the point where it made people un­cer­tain about where he stood. These abil­it­ies turned Sum­mers in­to a first-rate briefer, a qual­ity that Obama greatly ap­pre­ci­ated. Sum­mers can also point to some im­port­ant achieve­ments that have helped with Amer­ica’s fin­ances, such as the in­tro­duc­tion of in­fla­tion-in­dexed bonds to the Treas­ury.

Sum­mers’s al­lies say his ar­rog­ance is more un­con­scious than ma­li­cious, a product of his ag­gress­ive search for new think­ing. In a 2010 in­ter­view, Clin­ton’s tough-talk­ing trade rep­res­ent­at­ive, Char­lene Barshef­sky, re­called when Sum­mers, as Treas­ury un­der­sec­ret­ary in the 1990s, hu­mi­li­ated her deputy in a room full of staffers, telling the deputy that he would have flunked him as a stu­dent if he’d made such weak ar­gu­ments about a trade is­sue. Af­ter­ward, the di­min­ut­ive Barshef­sky walked up to the beefy Sum­mers and said, “If you ever do that again, I’ll break your fuck­ing knees.” Sum­mers was shocked, and per­haps dis­mayed, that he’d of­fen­ded a Cab­in­et of­fi­cial. “He didn’t even know what he did,” Barshef­sky re­called. Sum­mers later called the aide to apo­lo­gize.

But the danger of such a pro­cliv­ity to­ward ar­rog­ance and dis­dain of oth­ers is that the Fed­er­al Re­serve chair­man op­er­ates with few re­straints. (That’s one reas­on Con­gress reg­u­larly tries to force more ac­count­ab­il­ity on the Fed board.) True, as a poli­cy­maker, Sum­mers is no bomb-throw­er; he has moved cau­tiously his en­tire ca­reer, and he’s no stranger to build­ing con­sensus, though it has of­ten been be­hind de­reg­u­la­tion. But if he were Fed chair­man, the U.S. and glob­al eco­nom­ies would get, for at least four years, a dom­in­eer­ing per­son­al­ity in a po­s­i­tion to si­lence dif­fer­ing views. That mat­ters now more than ever. The Fed­er­al Re­serve over­sees the large banks and the non­bank “sys­tem­ic­ally im­port­ant fin­an­cial in­sti­tu­tions” at a time when, in the wake of the eco­nom­ic crisis, re-reg­u­la­tion of the glob­al fin­an­cial sys­tem is a cru­cial is­sue. But Sum­mers spent most of his ca­reer in Wash­ing­ton ad­voc­at­ing for de­reg­u­la­tion and Wall Street. He has worked as a paid ad­viser for Cit­ig­roup, Nas­daq OMX Group, the D.E. Shaw & Co. hedge fund, and the ven­ture cap­it­al­ists at An­dreessen Horow­itz, ac­cord­ing to TheWall Street Journ­al. “He has been seen to be, and prob­ably is, cap­tured,” says long­time foil Stiglitz.

Re­cent his­tory of­fers two con­trast­ing ex­amples of why Sum­mers’s chron­ic in­ab­il­ity to con­cede er­ror and his pre­dilec­tion to fa­vor Wall Street are wor­ri­some. Sum­mers’s former ment­or, Green­span (with whom he was li­on­ized on the cov­er of Time), ad­mit­ted no dis­sent from his views when he was Fed chair­man. Un­able to see past his liber­tari­an ideo­logy, Green­span presided over de­reg­u­la­tion for 18 years, of­ten with Sum­mers’s sup­port, swat­ting away all ef­forts to over­see bank­ing. That led to the 2008 crash.

Green­span’s suc­cessor, Ben Bernanke, by con­trast was able to ad­mit he’d been wrong in ini­tially un­der­es­tim­at­ing the im­pact of the subprime-mort­gage dis­aster. A Re­pub­lic­an nom­in­ee, Bernanke su­per-em­powered the Fed, ex­pand­ing its lend­ing au­thor­ity in un­pre­ced­en­ted ways to res­cue the eco­nomy from a down­turn and fin­an­cial pan­ic that he real­ized was all too sim­il­ar to the one that led to the Great De­pres­sion, his life’s fo­cus as a schol­ar. Bernanke’s ac­tions at the Fed, in fact, dwarfed any­thing the Bush or Obama ad­min­is­tra­tions did on the fisc­al side. He summoned the in­teg­rity and hu­mil­ity to re­verse him­self, with pro­found ef­fects. Could Sum­mers, who ten­ded to un­der­es­tim­ate the sys­tem­ic nature of the crisis, have done the same?

THE DE­REG­U­LA­TION WARS

After the So­viet Uni­on col­lapsed, a new or­tho­doxy began to take shape, and Sum­mers was one of its loudest pro­ponents. It held that Wash­ing­ton should free up the glob­al eco­nomy by open­ing cap­it­al flows around the world, ex­empt swaps and oth­er new de­riv­at­ives from reg­u­la­tion, and pro­tect the grow­ing fin­an­cial con­glom­er­ates from any fur­ther over­sight. To that end, Sum­mers and his al­lies backed the 1999 re­peal of the Glass-Steagall law, per­mit­ting com­mer­cial banks to jump in­to risky in­vest­ment-bank­ing activ­it­ies. Sum­mers saw the re­peal as “his­tor­ic le­gis­la­tion” that would re­place De­pres­sion-era rules “with a sys­tem for the 21st cen­tury.” He also came to ex­tol Green­span and to dog­mat­ic­ally sup­port the lat­ter’s liber­tari­an views of the es­sen­tial ra­tion­al­ity of fin­an­cial firms and their abil­ity to reg­u­late them­selves, even though these views some­times con­tra­dicted the con­clu­sions of Sum­mers’s own aca­dem­ic work from the 1980s.

At the an­nu­al meet­ing of cent­ral bankers in Jack­son Hole, Wyo., in 2005, just be­fore the risks in the subprime mar­ket began to show them­selves, Uni­versity of Chica­go eco­nom­ist Raghuram Ra­jan de­livered a stun­ningly pres­ci­ent pa­per about the grow­ing risks in the fin­an­cial sys­tem. His fun­da­ment­al point — that Wall Street’s gi­ant fin­an­cial in­sti­tu­tions don’t al­ways act ra­tion­ally — was also an im­pli­cit cri­tique of seni­or poli­cy­makers like Sum­mers. For years Sum­mers had as­sumed that the Asi­an fin­an­cial mar­kets col­lapsed be­cause they were not as soph­ist­ic­ated as those in the West and were more prone to “crony cap­it­al­ism.” But Ra­jan ar­gued that the West might not be spe­cial. “The usu­al story was that emer­ging mar­kets have had these big prob­lems over last few year be­cause of hor­rible in­fra­struc­ture, hor­rible reg­u­la­tion, not enough dis­clos­ure,” Ra­jan re­called later. The West sup­posedly had “checks and bal­ances” that made it im­mune to the lun­acy of the boom. Ra­jan was say­ing that these checks — the reg­u­lat­ory struc­ture — had been evis­cer­ated dur­ing the ten­ure of Green­span, Sum­mers, and oth­ers.

Stand­ing up in re­but­tal, Sum­mers spoke of how much he had learned from Green­span, the Ayn Rand de­votee who be­lieved that Wall Street fin­an­cial in­sti­tu­tions could al­ways be trus­ted to pre­serve the sys­tem, and then he launched in­to a fierce at­tack on Ra­jan, say­ing he found “the ba­sic, slightly Lud­dite premise of this pa­per to be largely mis­guided.” Sum­mers in­voked a fa­vor­ite ana­logy: The de­vel­op­ment of fin­ance is like trans­port­a­tion. We ad­vanced from a prim­it­ive sys­tem in which people provided their own power — they walked — to one in which they used tools they own them­selves, like horses. Then we re­lied on in­ter­me­di­ar­ies, such as stage­coach lines. Over time, the trans­port­a­tion sys­tem was cent­ral­ized in­to air­ports and train sta­tions. As a res­ult, ac­ci­dents, when they oc­curred, were much lar­ger and more ser­i­ous. But the “over­whelm­ingly pos­it­ive” thing was that sub­stan­tially few­er people died over­all. The same thing was hap­pen­ing in fin­ance, he said, as people came to rely on more and more soph­ist­ic­ated glob­al banks. Sum­mers al­lowed that, just as the Fed­er­al Avi­ation Ad­min­is­tra­tion over­sees the air­ways, some ad­di­tion­al reg­u­la­tion might be con­sidered in the fin­an­cial sec­tor. But he warned that too many rules would dam­age all the pos­it­ive things, such as de­riv­at­ives, hap­pen­ing in “fin­an­cial in­nov­a­tion.”

Ra­jan had read the risk bril­liantly, however, and three years later Sum­mers looked em­bar­rass­ingly wrong. The en­tire “trans­port­a­tion sys­tem” — the fin­an­cial sys­tem, that is — went up in smoke. And the Fin­an­cial Crisis In­quiry Com­mis­sion later con­cluded that sev­er­al of Sum­mers’s moves were cent­ral to the crisis. Sum­mers was nev­er known to con­cede that Ra­jan, who re­cently be­came gov­ernor of In­dia’s cent­ral bank, had been right.

Sum­mers has also denied mak­ing any mis­takes when he ad­vised the pres­id­ent dur­ing his time as dir­ect­or of the Na­tion­al Eco­nom­ic Coun­cil in 2009-10. In an op-ed in The Wash­ing­ton Post last year, as eco­nom­ic growth lagged and cri­ti­cism moun­ted that he had failed to push a big-enough stim­u­lus meas­ure on Obama in 2009, Sum­mers sought to de­flect any blame, say­ing no one knew how bad the down­turn would get. “Eco­nom­ic fore­casters di­vide in­to two groups: those who can­not know the fu­ture but think they can, and those who re­cog­nize their in­ab­il­ity to know the fu­ture,” Sum­mers wrote. But as journ­al­ist Noam Scheiber doc­u­mented in his 2012 book, The Es­cape Artists: How Obama’s Team Fumbled the Re­cov­ery, Sum­mers knew, as an as­tute eco­nom­ist, that the planned stim­u­lus was too small to turn the eco­nomy around. When Christina Romer, then-chair­wo­man of the Coun­cil of Eco­nom­ic Ad­visers, ar­gued that the stim­u­lus needed to be more than twice as large as the planned $800 bil­lion, Sum­mers cut her out of the dis­cus­sion and gave Obama, ap­par­ently for polit­ic­al reas­ons, only the op­tion of a mod­estly sized stim­u­lus. The pres­id­ent had “little reas­on to sus­pect that this amount was per­haps $1 tril­lion too small,” Scheiber wrote. It may well be, as Sum­mers sus­pec­ted, that Con­gress would nev­er have giv­en Obama more, but the pos­sib­il­ity was nev­er even tried.

Nor has Sum­mers ever ad­mit­ted that the Com­mod­ity Fu­tures Mod­ern­iz­a­tion Act of 2000, of­ten cited as one of his main achieve­ments as Treas­ury sec­ret­ary, led dir­ectly to the fin­an­cial crash, a con­clu­sion of the FCIC re­port. Sum­mers’s spon­sor­ship of the act was the cul­min­a­tion of his long fight to pre­vent the reg­u­la­tion of de­riv­at­ives trad­ing. Chan­nel­ing the views of Wall Street, he be­lieved that even a hint of reg­u­la­tion would send all de­riv­at­ives trad­ing over­seas, cost­ing Amer­ica busi­ness. (It was the un­spoken as­sump­tion in those years that what was good for Wall Street was good for the U.S. eco­nomy, and vice versa.) When Brook­s­ley Born, then the chair­wo­man of the Com­mod­ity Fu­tures Trad­ing Com­mis­sion, de­vised a 1998 pro­pos­al sug­gest­ing that over-the-counter de­riv­at­ives be reg­u­lated, he called her, liv­id. Al­though she did not re­port to him, he dressed her down loudly. Born’s deputy, Mi­chael Green­ber­ger, says he walked in as the call was end­ing. “She was ashen,” he re­calls. “She said, ‘That was Larry Sum­mers. He was shout­ing at me.’ “

Sum­mers told Born that a group of bankers had come to his ofï¬ce to say it did enorm­ous dam­age to their busi­ness just for her to raise these ques­tions, and he let her know she should just stop do­ing it. Born later said, “I was as­ton­ished a po­s­i­tion would be taken that you shouldn’t even ask ques­tions about a mar­ket that was many, many tril­lions of dol­lars in no­tion­al value — and that none of us knew any­thing about.”

Even after the fin­an­cial crash of 2008, Sum­mers did not re­lent in his view that little else could have been done back then, des­pite the FCIC’s re­port and oth­er stud­ies that con­cluded oth­er­wise. Sum­mers’s boss and ment­or, then-Treas­ury Sec­ret­ary Robert Ru­bin, con­ceded dur­ing the post-crash hear­ings in 2010 that Born was “right about de­riv­at­ives reg­u­la­tion.” Even former Pres­id­ent Clin­ton later ad­mit­ted he should have reined in de­riv­at­ives trad­ing.

Ar­thur Levitt, who ran the Se­cur­it­ies and Ex­change Com­mis­sion dur­ing the Clin­ton years, told me after the crash that he and his col­leagues had made a ser­i­ous mis­take in pil­lory­ing Born. “All tra­gedies in life are al­ways pro­ceeded by warn­ings,” he said. “We had a warn­ing. It was Brook­s­ley Born. We didn’t listen to that.” But Sum­mers was still so sure of his own cor­rect­ness that, when he saw Levitt on Cap­it­ol Hill in Novem­ber 2008, he fought back. “I read some­where you were say­ing that maybe Brook­s­ley Born was right. But you know she was really wrong,” Sum­mers said, ac­cord­ing to someone who over­heard the con­ver­sa­tion, which Levitt later con­firmed. “Her plan was no good. And we offered a dif­fer­ent plan.”

In truth, there had been no oth­er plan, at least not one that any­one ever tried to en­act. Sum­mers ap­peared to be re­fer­ring to a vague re­com­mend­a­tion, ban­died about in 1997, to get the SEC to reg­u­late de­riv­at­ives broker-deal­ers, which nev­er got off the ground. When I asked him about this en­counter in a 2010 in­ter­view, Sum­mers said, “Well, you know, I didn’t say she was really wrong. I said the reas­ons [Levitt] took the po­s­i­tion [he] took was that there was con­cern that Brook­s­ley’s ap­proach was go­ing to un­der­mine leg­al cer­tainty [about the le­git­im­acy of tril­lions of dol­lars of de­riv­at­ives trades already out on the mar­ket]. It wasn’t that we didn’t want to reg­u­late de­riv­at­ives. We offered a dif­fer­ent ap­proach.” But even Levitt said this de­mur­ral missed the point: Born had seen danger in a mar­ket that no one else did at the time, and she de­served cred­it for that. A little mag­nan­im­ity was in or­der. Leg­al cer­tainty could have been ad­dressed un­der Born’s ap­proach. “Ru­bin and Green­span were prob­ably right in say­ing there were out­stand­ing con­tracts thrown in­to un­cer­tainty,” Levitt said. “But we could have grand­fathered those and said that thence­for­ward we were go­ing to reg­u­late them.”

In his in­ter­view with me, Sum­mers also ap­peared to mis­rep­res­ent his earli­er po­s­i­tion on de­riv­at­ives, at least as it was re­membered by oth­ers. “I nev­er sug­ges­ted the de­riv­at­ives mar­ket was cap­able of poli­cing it­self,” he said. “I pushed for what’s now be­ing dis­cussed, to put [over-the-counter de­riv­at­ives] on ex­changes. We nev­er got any­where. In the Pres­id­ent’s Work­ing Group Re­port in Novem­ber 1999, the Fed dis­sen­ted, but the rest of us in­sisted that broker-deal­ers be reg­u­lated.”

In fact, Green­ber­ger says, no one was dis­cuss­ing ex­changes or clear­ing­houses at the time — only the simple act of “re­port­ing” de­riv­at­ive trades to reg­u­lat­ors, which is all he and Born thought was pos­sible. Yet Sum­mers re­mon­strated with Born over even ask­ing ques­tions. Green­ber­ger, reached by e-mail, says that be­fore he resigned from his post in Septem­ber 1999, “I nev­er heard word one about ex­changes from any Treas­ury of­fi­cial.” And when Sum­mers, by then Treas­ury sec­ret­ary, chaired the Pres­id­ent’s Work­ing Group on Fin­an­cial Re­form that year, his re­port nev­er men­tioned ex­changes or any oth­er swaps reg­u­la­tion. “The proof in the pud­ding is Sum­mers’s Decem­ber 2000 let­ter to [Sen.] Phil Gramm [a lead­ing spon­sor of the le­gis­la­tion] en­thu­si­ast­ic­ally en­dors­ing the CFMA,” Green­ber­ger says. “The CFMA just did not stop the CFTC from reg­u­lat­ing. It stopped every fed­er­al reg­u­lat­ory en­tity from reg­u­lat­ing swaps, and even state law was also al­most com­pletely pree­mp­ted. What you have here is Sum­mers’s two writ­ten doc­u­ments in Novem­ber 1999 and Decem­ber 2000 ad­voc­at­ing de­reg­u­la­tion, against the present claim (un­sup­por­ted by any con­tem­por­an­eous doc­u­ment­a­tion) that he was for ex­change trad­ing of swaps at that time.”

Those at­ti­tudes per­sisted after the biggest fin­an­cial crash in his­tory in 2008. Even dur­ing the fight over the Dodd-Frank fin­an­cial-reg­u­la­tion law, says Green­ber­ger, who was then help­ing law­makers draft the bill, “the pro­gress­ive groups had to fight like hell to get ex­change trad­ing in the le­gis­la­tion. My dis­tinct memory is that neither the White House nor Treas­ury dur­ing the le­gis­lat­ive battles on this ques­tion in 2009 sup­por­ted ex­change trad­ing of swaps. In fact, they en­dorsed an ini­tial House com­mit­tee draft in early Oc­to­ber 2009 that not only did not re­quire ex­change trad­ing but made clear­ing ‘vol­un­tary’ on the part of the banks.”

LIKE A BOSS

How would all of this play out at the head of a sprawl­ing or­gan­iz­a­tion with frac­tious con­stitu­en­cies? Sum­mers’s time as pres­id­ent of Har­vard Uni­versity is in­struct­ive. By most ac­counts, it was a dis­aster, be­cause of his tem­pera­ment­al un­suit­ab­il­ity for the job. His time there was marked by series of in­dis­creet re­marks and policy in­sens­it­iv­it­ies. First, he of­fen­ded Afric­an-Amer­ic­an schol­ars by ques­tion­ing the re­search and work habits of the au­thor and crit­ic Cor­nel West, who promptly left for Prin­ceton. Then, at a cas­u­al for­um with stu­dents in Janu­ary 2005, Sum­mers sug­ges­ted that one reas­on there were so many more men than wo­men in top sci­ence and en­gin­eer­ing po­s­i­tions was a “dif­fer­ent avail­ab­il­ity of aptitude at the high end” between the sexes. One par­ti­cipant, Nancy Hop­kins, an MIT bio­lo­gist and a Har­vard gradu­ate, got up and walked out, telling TheBo­ston Globe later that if she hadn’t left, “I would’ve either blacked out or thrown up.” After someone else pos­ted Sum­mers’s com­ments on­line, the con­tro­versy erup­ted na­tion­ally. “There was a sense, not just of a bar­bar­i­an at the gate, but a bar­bar­i­an in Mass Hall,” says Richard Brad­ley, who wrote a crit­ic­al book about Sum­mers’s ten­ure at Har­vard. “Here was a guy who had seemed all too anxious to get to Wash­ing­ton, and when he got there seemed to in­tern­al­ize the val­ues and pri­or­it­ies of that cul­ture. And brought them back with him, along with a chauf­feur and a press sec­ret­ary and a chief of staff.”

In Cam­bridge, he showed oth­er signs of his aver­sion to ad­mit­ting er­ror. In a lec­ture at Har­vard Busi­ness School in early 2002, Sum­mers harshly cri­ti­cized a pa­per cowrit­ten by a newly min­ted Ph.D., Rawi Ab­delal. The pa­per had sug­ges­ted that Malay­si­an Prime Min­is­ter Ma­hathir Mo­hamed’s de­cision to im­pose cap­it­al con­trols dur­ing the Asi­an eco­nom­ic crisis, which Sum­mers had op­posed at the time, may have been right after all. Some eco­nom­ists had already be­gun ar­guing that the tac­tic had worked — Malay­sia’s eco­nomy was now per­form­ing well. Sum­mers bran­dished the Ab­delal pa­per be­fore his audi­ence of M.B.A. stu­dents and aca­dem­ic col­leagues — now his sub­or­din­ates — and sug­ges­ted that they didn’t know the real world the way he did. “In my ex­per­i­ence, cap­it­al con­trols don’t work,” Sum­mers said. “They’re al­ways a bad idea.” Ab­delal later told me, “It was a little an­noy­ing in the sense that we were try­ing to have a So­crat­ic dia­logue. This was a Har­vard Busi­ness School case study, which is sup­posed to present both sides. It’s not like there’s sci­ence and truth all on one side.” Today, even the In­ter­na­tion­al Mon­et­ary Fund has ac­cep­ted that cap­it­al con­trols can some­times work.

The end for Sum­mers at the uni­versity came after a fi­nal faux pas. A one­time protégé, eco­nom­ist An­drei Shleifer (along with his wife, hedge-fund man­ager Nancy Zi­m­mer­man), had be­gun in­vest­ing in Rus­sia in the mid-1990s, while he led a Har­vard eco­nom­ic-re­form pro­gram there. This vi­ol­ated the State De­part­ment’s con­flict-of-in­terest re­stric­tions, and a fed­er­al court in 2004 found Shleifer li­able in a con­spir­acy to de­fraud the U.S. gov­ern­ment about the con­flict. The uni­versity ul­ti­mately had to pay $26.5 mil­lion to settle the case. Yet when fac­ulty mem­bers asked Sum­mers to com­ment on the gi­ant scan­dal at a fac­ulty meet­ing in 2005, he re­peatedly said he didn’t have enough know­ledge of the case. At that mo­ment, Brad­ley says, Sum­mers lost the uni­versity. (“I should have chosen my words dif­fer­ently at that fac­ulty meet­ing. And I’ll al­ways wish that I had,” Sum­mers un­char­ac­ter­ist­ic­ally told me in 2010.)

Un­like the Fed, Har­vard is built to hold lead­ers ac­count­able. On March 15, 2005, the Arts and Sci­ences fac­ulty passed a mo­tion of “lack of con­fid­ence” in Sum­mers’s lead­er­ship. He resigned just five years in­to the job, the shortest pres­id­ency at Har­vard since the Civil War.

At every stage of his ca­reer, Sum­mers has been helped along by friends and spon­sors who have as­sured doubters that he has ma­tured, that he’s smoothed out his rough edges. That is what his ment­or, Ru­bin, told the Har­vard search com­mit­tee. (“Ru­bin made us con­fid­ent we wer­en’t get­ting a bull,” a mem­ber later told The Bo­ston Globe.) It’s what Sum­mers him­self said when he joined the Obama ad­min­is­tra­tion, telling me in a 2009 in­ter­view: “I sus­pect over time there’s maybe a little less of the brusque­ness that people ex­per­i­enced when I was young­er.” (Romer later com­plained that Sum­mers had treated her “like a piece of meat,” ac­cord­ing to au­thor Ron Sus­kind.) And it is what Sum­mers’s de­fend­ers are say­ing about him now as a pro­spect­ive Fed chief. “We’re now talk­ing about the 58-year-old Larry, not the 30-year-old Larry,” fel­low Har­vard eco­nom­ist Ken­neth Ro­goff told me this week.

But in the end, des­pite all his oth­er ster­ling qual­it­ies, Larry Sum­mers’s char­ac­ter and tem­pera­ment have nev­er seemed to change much. And those qual­it­ies could eas­ily run amok in the closed world of the Fed­er­al Re­serve, where a single in­di­vidu­al holds sway over the course of the en­tire glob­al eco­nomy. Is that a risk Barack Obama is pre­pared to take?

CLA­RI­FIC­A­TION: The an­ec­dote about Char­lene Barshef­sky comes from an in­ter­view she had with the au­thor for his 2010 book, Cap­it­ol Of­fense: How Wash­ing­ton’s Wise Men Turned Amer­ica’s Fu­ture Over to Wall Street. An earli­er ver­sion of this art­icle im­plied she gave the in­ter­view more re­cently.